Islamabad, August 21, 2023 – The Federal Board of Revenue (FBR) in Pakistan has recently released an updated structure of taxation on salary income, with the new regulations coming into effect on July 1, 2023.
These guidelines provide clarity on how salary income will be taxed in the country.
The FBR’s latest directive is based on the Income Tax Ordinance of 2001, and it outlines the taxation framework for individuals’ income earned through employment.
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According to section 12 of the Income Tax Ordinance, 2001, the following key points were highlighted:
(1) Taxable Salary: Any salary received by an employee in a tax year, which is not exempt from taxation under the ordinance, will be subject to tax under the ‘Salary’ category.
(2) Definition of Salary: Salary, as defined, includes various forms of remuneration such as regular pay, wages, leave pay, payment in lieu of leave, overtime pay, bonuses, commissions, fees, gratuity, and work condition supplements. It also encompasses any perquisites, allowances (excluding those solely spent on employment-related duties), employer-covered expenditures, profits in addition to salary, pensions, and annuities.
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(3) Grossing Up: If an employer agrees to pay the tax on an employee’s salary, the employee’s taxable income under the ‘Salary’ category will be adjusted upwards by the amount of tax owed by the employer.
(4) No Deductions Allowed: Expenditures incurred by an employee in generating income categorized as ‘Salary’ are not eligible for deductions.
(5) Receipt of Perquisites: It’s crucial to note that any amount or perquisite received by an employee from employment, whether provided by the employer, an associate of the employer, a past employer, a prospective employer, or a third party under arrangements with the employer or associates, falls under the ‘Salary’ category.
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(6) Special Taxation Rate Election: Employees who receive specific amounts as mentioned in sub-clause (iii) of clause (e) of sub-section (2) during a tax year can opt for a special tax rate by following a formula based on their previous three years’ taxable income and tax paid.
(7) Taxation on Arrears: When any amount classified under ‘Salary’ is paid to an employee in arrears and results in higher tax rates, the employee can choose to be taxed at the rates applicable for the year in which the services were rendered.
(8) Election Deadlines: Employees making elections under sub-section (6) or (7) must do so by the due date for submitting their income returns or employer certificates for the relevant tax year or any later date permitted by the Commissioner.
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These updated guidelines aim to bring more clarity and transparency to the taxation of salary income in Pakistan. It is essential for individuals and employers to understand these regulations to ensure compliance with the country’s tax laws.
For further information and assistance with taxation matters, individuals and businesses are encouraged to consult with tax professionals or the Federal Board of Revenue (FBR).
